- A lower CBR influences lower lending rates, nourishing economic activities.
- When the country scrapped the rate cap which was at four per cent above the base lending rate, it gave lenders the freedom to price loans.
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Last week, the Central Bank's Monetary Policy Committee retained the base lending rate at seven per cent for the sixth consecutive time on accommodative policy stance and stable inflation.
In a statement, CBK said policy initiatives introduced at the onset of the pandemic have had the intended effect on the economy.
“The MPC concluded that the current accommodative monetary policy stance remains appropriate, and therefore decided to retain the Central Bank Rate (CBR) at seven percent,'' the MPC reads in part.
CBK Governor Patrick Njoroge said the MPC will closely monitor the impact of the policy measures. The next meeting will be in March 2021.
The apex bank said inflation remained well anchored with month-on-month overall inflation standing at 5.6 per cent in December 2020 compared to 5.3 per cent in November. This is within the set limit of 7.5 per cent.
While the base lending rate does not automatically determine the pricing of loans as was during the interest capping regime that was scrapped in 2019, it acts as a leading torch for commercial lenders.
When the country scrapped the rate cap, which was at four per cent above the base lending rate, it gave lenders the freedom to price loans.
Lower lending rate spurs economic growth
The apex bank set a base lending rate at nine per cent to guide lenders to reasonably set interest rates.
In November 2019, it lowered the base lending rate by 50 basis points to 8.50 before further dropping it to seven per cent early last year to ensure cheaper loans to cushion borrowers from the socioeconomic effects of Covid-19.
A lower CBR influences lower lending rates, nourishing economic activities.
When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy. Businesses and farmers also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing.
When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy. Businesses and farmers also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing.
Although analysts were divided on whether CBK should have lifted or further lowered the base lending rate, the regulator decided to maintain the status quo.
Those for lifting up argued that Covid-19 pressure was lessening hence the need to tighten the monitory stance while those for lowering wanted CBK to further cheapen the credit market to spur post-Covid-19 economic recovery.
Even so, the MPC noted that the package of policy measures implemented since March 2020 was having the intended effect on the economy, and is being augmented by the implementation of the announced fiscal measures in the FY2020-21 budget.
This means, for the next two months, lenders will continue pricing loans guided by the CBK's minimum of seven per cent. A commercial bank lending at a very high or lower rate than the CBR is likely to be flagged.
Banks are currently lending at an average of 13 per cent. This is six per cent above the base lending rate. A higher CBR is likely to push up loan pricing.